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2-year yield jumps above 5.0%, the highest level since 2007

US yields indicate there won't be a soft landing after all.

The US bond market continues to decline, pushing yields to record highs as investors price in a hawkish Fed heading into its monetary policy decision in March.

Powell spoke before the Senate Banking Committee on Tuesday, stating that recent US inflation and employment statistics had been higher than anticipated. As a result, it was probable that interest rates would need to rise more than had been anticipated earlier.

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As derivatives dealers factor in a full percentage point of Fed rate rises over the next four meetings, the yield on two-year Treasury notes hit the highest point since 2007 on Wednesday, reaching 5.08%. Importantly, longer-dated rates remained stagnant, with the 10-year rate maintaining virtually constant below 4% and 30-year bonds hardly moving since Friday.

US 2-year yield

US 2-year yield, source:

Yield curve inverted

As a result, the closely-monitored difference between 2- and 10-year rates showed a discount of more than one percentage point for the first time since 1981, when then-Fed Chair Paul Volcker managed interest rate hikes that broke the back of double-digit inflation at the expense of a protracted recession.

Anyone anticipating a reduction in interest rates in the near future is probably going to be let down, according to the CEO of Bank of America, who forecasts that the rates won’t begin to fall for at least a year.

Brian Moynihan, the CEO of BofA, does not anticipate a decline until the second quarter of next year.

“They’re going to have to hold it there for a long time because the labor market is still very tight, despite what you hear about layoffs, and financial conditions are strong, so companies have access to capital, albeit at higher costs,” Moynihan explained at the Financial Review’s business summit in Australia on Tuesday:

This comes after BofA strategists cautioned that the Fed would need to raise interest rates to the “point of pain” in order to return inflation to the 2% year-over-year growth objective.

US labor market remains strong

In other news, after plummeting to its lowest level in two years (attributed to weather) in January, ADP’s employment report for February was projected to demonstrate a comeback of 200,000 jobs. The real print was considerably greater at +242,000, while January’s was revised up to +119,000.

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Nevertheless, wage growth for job-holders dropped to 7.2% in February, the lowest rate of increase in a year. Earnings growth for job-hoppers also slowed, falling from 14.9% to 14.3%.

ADP change in February

“There is a tradeoff in the labor market right now. We’re seeing robust hiring, which is good for the economy and workers, but pay growth remains quite elevated. The modest slowdown in pay increases, on its own, is unlikely to drive down inflation rapidly in the near-term.” ADP’s chief economist Nela Richardson said


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